Gold is getting less and less of a boost from QE

The latest quantitative easing program by the U.S. Federal Reserve may give gold less of a boost than the last two rounds – and if so, that will probably be because gold traders are getting smarter.

“There is a speculative aspect to gold’s demand just as there is for any other capital market aspect,” said John Kicklighter, chief currency strategist at DailyFX.com, in emailed comments.

“That said, investors recognize the implications of positioning ahead of stimulus programs as there is a market boost after the central bank’s bid hits the market,” he said. “And, since this is the third iteration of QE specifically, people are even more aware of the impact so they try to position ahead well in advance.”

Before the Fed announced the first round of quantitative easing, or QE1, on Nov. 25, 2008, gold prices were rising, gaining about 16% from Nov. 13 of that year to the day of the announcement. In the following three months, gold gained another 18%.

Fast forward two years to the summer of 2010. A few weeks before Federal Reserve Chairman Ben Bernanke\’s Jackson Hole speech on Aug. 27, 2010 sent market expectations of more stimulus spiking, gold prices began their ascent. Gold climbed 12% from Aug. 10 to the day of the QE2 announcement on Nov. 3, 2010. In the following three months, gold gained 1.2%.

“QE2 had a huge and immediate influence on the market as it caught the market by surprise,” said Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund. “However … the market really responded more to hints of QE2 at the August/September 2010 Jackson Hole meeting, more so than the actual announcement and implementation.”

“Arguably, even for QE3, the market responded in more dramatic fashion in 2011 when QE3 commentary was being bandied about than the actual announcement of QE3,” he said. “This is not surprising as markets are discounting mechanisms. The big mystery is if the Fed will really continue with its quantitative easing policy if the economy fails to respond.”

By August 15, 2012, prices for the precious metal already started their climb in anticipation of a QE3 announcement, adding more than 10% by the official Fed announcement, which came on Sept. 13 during the regular gold trading session. Since the close before that announcement, gold has risen 2.3%.

The rise from around $1,625 to September\’s highs was “heavily influenced by stimulus expectations,” said Kicklighter. “The question we need to ask is whether the bullish interest was from those looking to avoid the devaluation of traditional fiat assets that are manipulated by such changes (Treasurys, etc.) or an interest to simply make profit on the rally.”

“The former group is more likely to hold, while the later will cover positions when it is clear momentum is done — leading to a quicker and more aggressive reversal,” he said.

The seemingly muted effect of QE3 also has at least one other implication.

“This declining influence of QE3 on metal prices [shows that] the Federal Reserve’s monetary expansion is not translating into private-sector credit growth and materially effecting the real economy,” said Mimani.

On Friday, Gold for December delivery
closed at $1,773.90 an ounce in New York, down 0.4% for the session, but up over 5% for the month.

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